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The Forum > Article Comments > Does the Greek tragedy have lessons for Australia? > Comments

Does the Greek tragedy have lessons for Australia? : Comments

By Andrew Leigh, published 28/5/2010

The effect of Greece on the Eurozone shows that within a monetary union contagion is a serious problem.

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The Greek Debt problem has been greatly exaggerated. Let's put things in perspective shall we:

Let's compare the Greek GDP v's the EU GDP v's the World GDP.
GDP of the EU : $12,500 billion euro.
GDP of Greece : $240 billion euro.
GDP of the World (PPP) : US$70,000 billion (2009)
So the whole of the Greek economy comes in at less than 2% of the EU economy, in other words if the whole of Greece ceased to exist tommorow by some extreme unrealistic event, say a mega earth-quake, the rest of Europe's economy would notice if they were looking for it but wouldn't be concerned about it and the world's economy would barely detect it at all. (This is in terms of cost of impact, however, in terms of the loss of services and products the EU and world would notice because Greece supplies a sizable part of the world's shipping-- in fact Greece is the world's largest maritime nation with about 18% of the world fleet is Greek, but the debt crisis has had no negative impact on this).

If the Greek Debt crisis has any lesson at all for Australia it would be that the media and general public have no sense of perspective! Things reported in the media are rarely as bad as the seem and usually turn out to be nothing more than insignificant footnotes of history.
Posted by wiggies, Friday, 28 May 2010 11:15:48 AM
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Interesting,
Those financial institutions that lent money to Greece would notice if the country disappeared.
Whatever the significance of the Greek crisis,there's a lesson for anyone that proposes a monetary union between Australia and NZ, without a political union.Is there much support for the idea in either country?
Posted by mac, Friday, 28 May 2010 1:51:36 PM
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wiggies, you could not be more wrong. The facts & opinion you espoused are sort of true, up to a point, but its about the domino effect, whenever this sort of thing happens.

One bank goes bankrupt when an entity can't repay, then the other bigger bank it borrowed from, then the "Dud Loan" insurance company is in trouble, etc, etc, etc.

"The Great Depression" was hardly a footnote in history.

mac, correct, but they have also, often, "kite flown" about an ASEAN &/or APEC, Economic Union. Care for a slice of US debt anyone, or Japan's?

Sorry Andrew, most of your article was good, except for the third sentence. The red/green/getup/labour coalition did not save OZ from recession at all, they only delayed it.

If they had not given Westpac & the Commonwealth bank taxpayers money to take over Bankwest & St George our banking industry would be less concentrated than it is now, more competitive.

If they had not done, cash give aways, or alleged, "infrastructure" wasted spending, our economy would have experienced a slight retraction or downturn. The incoming conservative government would have SOME surplus money to turn it around, more quickly, easily, gently or conservatively. Yanking on the economic levers, clumsily, does not help, tweaking gently, does it.

Now, the cupboard is bare, when GFC#2 hits us, as it always was, it will be deeper & for longer. Thank you red/green/getup/labour coalition.

http://barnabyisright.com/

The opposition, in QLD especially has only been, the least worst of the 2 "Major Mistakes". Vote for real minor parties & independents.

Number the red/greens last, getup/labour second last, liberals third last, nationals fourth last, then number every real minor party & independent ahead of them.

http://www.democrats.org.au/

http://www.australiafirstparty.com.au/cms/

http://www.ldp.org.au/
Posted by Formersnag, Friday, 28 May 2010 3:50:39 PM
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Formersnag: "... its about the domino effect, whenever this sort of thing happens. One bank goes bankrupt when an entity can't repay, then the other bigger bank it borrowed from, then the "Dud Loan" insurance company is in trouble, etc, etc, etc."

The domino effect that you've just described is not a real reflection of economic reality. This is because when *any* country or private investor lends money they calculate the risk of borrower default and factor it into their calculations about how much they can safely lend and at what rate. Default of a single borrower is never a problem. For example, every year in Australia thousands of business and individuals go bankrupt yet the banks still make billions of dollars in profit.

The Greek debt would be a problem *if* there were a row of domino countries primed to fall. However, it is very unlikely that there is a row of dominoes. The only time a domino effect occurs is when the default of some debtor effects the system in some *unknown* way that the lender cannot/hasn't planned for and that effect causes even more debtors to fail. No one has as yet pointed out exactly how a Greek default could cause major unforeseen negative knock-on consequences.

The media makes out that if Greece defaults then the other PIGS -Portugal, Ireland, Spain- will fall, simply because they themselves have large debts. However, they have not as yet clearly detailed any mechanism how a Greece default will lead to further defaults. Just because some countries have massive debts with the a just few lender countries doesn't necessarily mean that the whole lot will fail just because one does-- there has to be a previously *unknown* strongly negative feed-back connection for this to happen.
As an example, if I have a next door neighbour who is a chef and another who is a doctor and both have massive debts and one goes under that won't effect the other neighbour because the two are distantly related economically-- even if they both use the same currency and the same bank.
Posted by thinkabit, Friday, 28 May 2010 5:26:33 PM
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The problem is...when my plan of Global Governance, facilitated by my Climate Change scam is fulfilled.. we will have mutually assured economic destruction. Of course.."I" will not be effected by this, because I already have my luxury pads here and there... my private jet etc and I also control around $5,000,000,000 of other peoples money.

I am (through my company, Generation Investements LLC) one of the 10 top shareholders in 'Climate Exchange' Europe and this guarantees me an unlimited supply of money when Cap and Trade laws are implemented.

My friend Maurice Strong and I have done very well out of the Climate Change/Global governance thing.. and we don't really care if the Economies of nations collapse, because "we are alright Jack".

We have structured things in this Global Govenance manner to enable us to maintain tight control over what people do, say and even think.
Our regional functionaries "Human Rights Tribunals/commissions" carry on this work at regional Tax payer expense.. we love that!

LESSON from Greece? Yes.. "globally interdependant/connected economies" mean "mutually assured destruction" when the poo hits the fan and the money runs out. (Except for mine and Maurice's and our mate George Soros..our money won't run out)
Posted by ALGOREisRICH, Friday, 28 May 2010 5:39:39 PM
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*No one has as yet pointed out exactly how a Greek default could cause major unforeseen negative knock-on consequences.*

We do know what could happen. A very large chunk of Greek Govt
debt, is owed to French and German banks. If the Greeks don't
pay, down go those banks, which has huge ramifications for
both the French and German economies. That is why France
and Germany are paddling so hard, to find a solution.
Posted by Yabby, Saturday, 29 May 2010 9:26:00 PM
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Yabby: "... A very large chunk of Greek Govt debt, is owed to French and German banks. If the Greeks don't pay, down go those banks, ..."

It doesn't necessarily follow that the lenders (banks/instituational investors/governements) that lent Greece money will also fail if Greece fails. The reason why is because before they lent Greece money (in fact before they lend anyone money) they would have considered what would happen in the event that they don't get their money back. When the debts are really big (like Government debts) they do a worst case senario-- in other words the French and German banks will have already accounted for a Greek default and its consequences *before* they lent them money. No money would've been lent if there was a foreseeable link between Greek default and themselves failing.

A single default by any single independent debtor should never backrupt a professional lender (regardless of who is lending and the size: whether it is a home-lender, international bank or government).
Lenders only run into trouble when many debtor's go bankrupt at once. Many debtor's can go backrupt quickly if:
1)it is a purely freak random effect-- many completely different unrelated things occurred that caused many of their debtor's to default (this is not the case with Greek debt default which is just one debtor) or,
2)there is some mechanism by which the default of one debtor causes the default of many other debtor's that the lender never planned for. This is what the GFC was about-- there was a strongly *unplanned/unforeseen* negative feedback connection between the default of subprime mortgages and falling house prices and the markets desire to take on any new CDO's/other complicated debt instruments. No-one yet has pointed out the existence of some previously *unforeseen/unaccounted for* negative feedback mechanism for Greece.

Although it is true that the Greek Government did lie about how bad their own debt problem was/is-- this in itself does not provide an mechanism that will cause *other* countries to default. The only major effect of the lying is the increase in chance of their *own* default.
Posted by thinkabit, Sunday, 30 May 2010 1:29:35 AM
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Of course it does.

It tells us we must cut down on the public service numbers, & what we pay them.

It tells us we are going the right way with retirement age.

It tells us that we must become restrictive, even protectionist, in foreign trade, & go back to making, & growing our own.
Posted by Hasbeen, Sunday, 30 May 2010 2:20:13 AM
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thinkabit, according to the Economist, the Greek State owes
Greek banks 8% of their total assets. AFAIK banks only have Tier
1 Capital of around 7-8%. Lose any of it, it has to be replaced
by shareholders for the bank to operate. That is exactly why
Britain had to bale out its banks with capital, when they lost
too much elsewhere. The same would apply to some German and French
banks, if they lost too much on Greece falling over. In Greece
of course that cannot happen, for obvious reasons!
Posted by Yabby, Sunday, 30 May 2010 9:09:24 AM
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wiggies, it’s not about “gross” GDP numbers, it’s about the ratio of debt as a % of GDP. The Eurozone has a debt servicing ratio of 62% of GDP. This is not an exaggeration.

Andrew has not fully covered the issues of how and why this happened and it does have direct lessons for Australia.

The EU has provided “free money” to nations it wanted in the EU Club. Greece, Spain, Italy, Portugal and Ireland have all been recipients of huge investment funds from the EU. The intent was that these countries could invest in infrastructure, manufacturing capacity, EU trade compliance and logistics. The EU wanted to build up trade with these countries, to grow collective wealth and stabilize disparate economies.

The original concept of the EU was a “Trading Block” with tariff free borders for goods and employees. Those countries now in financial trouble failed to take advantage and instead, spent these investments on populist/tokenistic policy programs designed only to keep their politicians in power.

They invested in things that did not deliver ongoing return on investment and self evidently, unsustainable. The deep pockets of France and Germany have kept the dream alive but now the borrowing capacity of even these countries can no longer sustain the debt ratio and the pigeons are coming home to roost.

What can Australia learn? Well for a start we should recognize that we are embarking upon precisely the same populist/tokenistic investment policies as the EU.

We spent the surplus, ran up a bigger national debt in less time than it took Hawk/Keating. Spent like a drunken sailor putting “free money” into the market. Cash handouts, pink bats, school computers, BER, NBN, Trade Centre’s in Schools (competing with TAFE’s), Childcare Centre’s, Medical Supercentre’s and so on. None of these policies have other than limited demand and benefit. When it comes to the litmus test of “will this provide Australia’s economy with infrastructure and an ongoing return on investment”? The answer is no, of course not. That is the way the EU has operated and that is what Australia can take as a lesson
Posted by spindoc, Sunday, 30 May 2010 10:47:01 AM
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The Author of this poignant Greek Odyssey is to be commended. Leigh compares the Grecian-apocalypse with other Nations that have survived the GFC. The disparity is discernible, although in Australia's case Rudd's capricious stimulus was overly propagandized. In the final analysis, it wasn't Rudd, but Treasurer boffin Ken Henry who modeled, presided and all but delivered the $ 53 B package. He's also responsible for 103 recommendations to overhaul the regressive, archaic Tax system - one of which is causing so much angst among the Mining Giants, and Overseas consortium's, that have shelved million dollar projects, courtesy of the diabolical trio Rudd, Swan and Tanner. To add fuel to a lost cause, Rudd has shamelessly broken his own advertising rules, by launching a $ 35 M media blitzkrieg of lies and intimidation to convince the Electorate. Since when does it cost money to bait children into accepting a truism ? Shouldn't it stand or fall on it's merits ?

At the onset of the Vietnam War, Secretary of State Kissinger coined the " domino theory " which achieved precious little, but embroiled the Allies in a twelve year duplicitous conflict. Hanoi is now a tourist destination and a valued trading partner.

The cascading deck-of-cards fallout from PIIGS, will most certainly impinge on the US Economy. The fake Ponzi stimulus after the Lehman Bros debacle, and a $ 1.2 T injection of " hot-off-the-press " printed money, has stifled innovation, production, competition, consumer confidence and recovery. Congress has now approved another $ 90 B more to appease the growing unemployment paradigm. Recovery ?

Presently there are 39.7 million Americans on food stamps.More then 17 % are unemployed. 47 % Americans have less then $ 10,000 saved. Should there be a Medical emergency in the family, odds are you will be left to die at the entrance. Their debt is 70 % of GDP, and by 2010 will be a staggering 100 pc.

Does this look like a Global revitalization ?

As the Greek tragedy unfolds, and the euro slides, it takes down the Aussie dollar with it. In turn, it
cont..
Posted by maxine, Sunday, 30 May 2010 2:57:14 PM
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threatens the US greenback. It will hurt US Exports to Europe. The multi-nationals profits will evaporate. IMF and ECB will have to pump up the rescue gambit; use the defibrillator to prevent cardiac arrest.

Hilary Clinton has often accused China of manipulating it's currency by NOT devaluing ? It's blatantly obvious, it will affect it's exports, which will have severe repercussions both internally, and at the coal-face. Commodities, merchandise, raw materials, infrastructure etc cost will escalate. It will do little to diminish bilateral trade. The US, like us, are a consumer Nation. We import more then we export - thus the deficit which Oz has maintained for well neigh twenty years with few exceptions.

For some time, China, OPEC, Brazil, Russia etc have been hollering for an alternative World currency change. Should China dump it's vast holdings of Treasury Bonds, investments, or short sell it's US Holdings, the Global Economic / Financial system will go into hysteric convulsions.

It behoves the US, as Banker of the last resort, to underwrite PIIGS recovery.

The main causes of Euro zone's Economic crisis is that virtually all countries involved, breached their own self-imposed rules and Covenants. Under the European Covenant, countries adopted (1) Govt debt must not exceed 60 % of GDP, at the end of the fiscal year. (2) Annual Govt deficits must not exceed 3% of GDP. Only two Countries of the 16 member Eurozone - Luxemburg and Finland have achieved this target. UK isn't a member: 69.1% debt, and deficit 11.5 %. Greece is the worst offender at 115.1% debt. Deficit 13.6 % of GDP. Ireland: 14.3%; Spain 11.2%; Portugal; 9.4% France 7.5% The 16 Nation EU adopted seven Principles: Impartiality, reliability, relevance,cost effectiveness, statical confidentiality, and lastly transparency. Say again ??

Since Apr.2000, the Greeks and others, have been guilty of fessing up their annual GDP, debt, growth and fiscal figures. The EU have cautioned it's Statistical Bureau a number of occasions for it's irregularities, tardiness, and rubbery data. If any thing, the EU milieu epitomizes it's gross failures and perfidy, for not applying stringent conditions and penalties,

cont..
Posted by maxine, Sunday, 30 May 2010 3:32:27 PM
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in accordance with it's own covenant. Standard & Poor's have since downgraded it's credit rating assessment to BB+. The equivalent of Junk status.

Greece is one of EU's poorest Nation's. Second lowest average income after Portugal. GDP: $ 343B. Public debt: $ 405.7 B. National debt: $ 552.2 B. Growth is minus two. Workforce: 4.9 million. Unemployment is 10 %, and tipped to reach 15 % next year i.e Bankruptcies, defaults, redundancies, and draconian austerity measures. It boasts a deficit of $ 42.83 in the RED.

Importantly, it must meet a debt deadline by 19 May.2011 or face the consequences. The specter is too horrendous even to contemplate.

Many thanks to the incompetence, cupidity, and sheer impotence of Sovereign Governments which will inexorably drag the Global Economy down. Govt's are no longer solutions. They are now problems, which have become a contagious liability.
Posted by maxine, Sunday, 30 May 2010 3:47:48 PM
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It tells us that socialism in any form, right or left is doomed to fail because it don't work. Read the instruction manual with an inquiring mind set not a doubting mind set and you may see that you reap what you sew and he who sews bountifly reaps abundantly and he who sews sparelingly reaps little. The Present generation of socialist leaders wish to reduce mankind back to hunter gathers with starvation being the norm not the exception, and it doesn't work.
20 years ago a friend of mine an entamologist told me that the green mind set was to downsize food production to feed 500 million people.
If you open your mind you will see that happening right before your eyes. I sell cattle and our price has been going down while meat at the retail is increasing. As production cuts are forced by manipulation or social engineering our brave leaders are encouraging us to harvest skippy as it is so much better for our flatulance and will save the planet . WHAT B.S.
Posted by Richie 10, Monday, 31 May 2010 4:22:54 AM
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Thinkabit
You almost got to the cause of the Great Financial Crash.
You were right about the housing mortgage crash triggering on the
GFC. However you did not raise a query as why that happened.

The problem started about 2005 2006 when oil prices started rising.
This pushed up the cost of fertiliser and farmers fuel prices which
put substantial pressure on food prices.
In addition as most Americans drive to work their commute costs rose.

Then to make matters worse a push for ethanol got under way.
The effect of diverting corn to fuel again pushed up food, especially
meat prices.

To get out of this GFC problem governments pushed borrowed money into
the market and/or to save the banks.
Their intention is to use growth income to repay the debts.
Catch 22 is there is no growth. Peak oil occurred in July 2008 just
before the economy crashed. That was not a co-incidence.
Five of the previous four crashes were preceded by oil price peaks.
Greece has no growth and so will never pay its debts.
That is it and many in the financial scene seem to be saying it out loud.

This situation gradually got worse as oil prices got higher in 2007
and finally when tightness in the oil market pushed oil to US$147
a barrel the mortgagees could no longer stand the strain and stopped
their payments.

The problem will not be fixed with either the printing press or that
final frontier pixel money.
Posted by Bazz, Tuesday, 1 June 2010 4:25:31 PM
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